DealLawyers.com Blog

A recent Farrell Fritz blog flags a new decision from New York’s Second Department holding that the broad “exclusive remedy” language in New York’s appraisal statute precluded a shareholder from bringing a claim for damages based upon share ownership, even if that claim related to another shareholder’s misappropriation of proceeds from the transaction. Here’s an excerpt from the blog:

The conventional path to a fair value appraisal proceeding under Section 623 of the Business Corporation Law (the “BCL”) involves deliberate invocation of the statute by the business entity, the dissenting owner, or both.

For corporation mergers and asset sales, the process ordinarily involves the entity’s transmission of written notice to shareholders of their right to dissent from the transaction and pursue an appraisal remedy (BCL § 605 [a]; BCL § 623 [l]), the shareholder’s written exercise of the right to dissent (BCL § 623 [a], [c]), the entity’s offer to purchase the dissenting shareholder’s interest for fair value (BCL § 623 [g]), a statutory negotiating period (BCL § 623 [h]), and, if the entity and shareholder cannot reach agreement on price, commencement by one side, or the other, of an appraisal proceeding (BCL § 623 [h], [1], [2]).

If, after all of that activity, neither side files an appraisal proceeding within the statutory timeframe, then “all dissenter’s rights shall be lost unless the supreme court, for good cause shown, shall otherwise direct” (BCL § 623 [h] [2]).

Under BCL § 623 (k), the “exclusive remedy” provision of the fair value appraisal statute, “[t]he enforcement by a shareholder of his right to receive payment for his shares in the manner provided herein shall exclude the enforcement by such shareholder of any other right to which he might otherwise be entitled by virtue of share ownership,” except an action for “equitable relief” to enjoin, set aside, or rescind “unlawful or fraudulent corporate conduct” (Breed v Barton, 54 NY2d 82 [1981]).

Can a shareholder lose all rights as shareholder under BCL § 623 (k) where neither the corporation, nor shareholders, did anything to invoke the fair value appraisal statute, and where all parties consent to the transaction?

Can that loss of rights include a shareholder’s ability to challenge a co-shareholder’s post-closing withholding of the proceeds from the very transaction that gave rise to potential dissenters’ rights?

Those were the consequential questions posed by a brand new appeals court decision, Klein v Wiley (___ AD3d ___, 2025 NY Slip Op 04715 [2d Dept Aug. 20, 2025]). The answer to both questions is a rather surprising “yes.”

The blog takes a deep dive into the trial court and appellate court decisions in the case and also highlights seemingly conflicting case law. It says that the key takeaway from Klein is that where a corporate transaction potentially triggers appraisal rights under New York law, the failure to exercise those rights “can lead to severe consequences, even for unknown, future events post-dating the closing, like misappropriation of the cash consideration from the very transaction itself creating dissenters’ rights.”

– John Jenkins